FT Alphaville » Markets live transcript 27 Apr 2009

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Markets live transcript 27 Apr 2009

Posted by Paul Murphy on Apr 27 11:01.

Markets live chat transcript for the chat ending at 12:07 on 27 Apr 2009. Participants in this chat were: Paul Murphy, FT (PM) Neil Hume, FT (NH) Sir Richard Branson (RB)

PM:

Welcome

PM:

It’s Monday.

PM:

This is Markets Live – FT Alphaville’s daily market commentary

NH:

Swine fever edition – obviously

PM:

But we have also got a Very Special Guest

PM:

More on that a bit later.

NH:

Apols if connection a bit dodgy this morning.

NH:

The first, fully confirmed case of Mexican swine flu in the UK has been with the FT’s internet connection

PM:

Actually, we’re not really worried by this possible pandemic.

NH:

I had it a month back – dreadful, but I survived.

PM:

He gave it to me, of course – and I nearly died.

PM:

I gave it to one of my daughters, Lili – she shrugged it off.

NH:

So between the three of us we must have the cure – the antidote.

PM:

Hmm – we could bottle Neil Hume

PM:

Then again….

PM:

Synthesise you.

PM:

Actually, we’d only sell the potion to rich people in the West –

PM:

The Guardian could start a campaign

PM:

Eventually we’d get generic Hume and everyone would be saved

NH:

PM:

maybe

PM:

Very good gags below

11:06AM

PM:

Anyway, how is the market fairing – in its ignorance of the fact that Neil Hume is the cure?

NH:

down

NH:

in the gripe swine fever panic

NH:

great news brokers though

NH:

plenty of chance to drum up comission

NH:

this company should be affected

NH:

this one should benefit

NH:

and some really shaky analysis

NH:

anyway

NH:

FTSE 100 down 44 points at 4,112

NH:

all down to swine flu

NH:

and in spite of a couple of bullish strategy pieces

NH:

Credit Suisse has upgraded UK equities this morning, for example

NH:

we can come to that a bit later

NH:

of course

PM:

NH:

another point

NH:

a bit of profit taking was probably in order after Friday’s amazing rise

NH:

now, I was away on Friday and had a bit of difficult understanding the move

NH:

dreadful GDP figs and woosh – up the market goes

PM:

Certainly did

PM:

People betting the stress-free tests in the US would save everyone

PM:

Go figure, etc

PM:

more details were released later on Friday

PM:

Methodology etc

PM:

And tha tgot Wall St groing

PM:

going , even

PM:

but back today

PM:

what’s moving?

NH:

well

NH:

airline stocks have been hit hard by the swine fever panic

NH:

British Airways off 12.1p to 151.8p

NH:

a drop of 7.4%

NH:

Lufthansa down 10%

NH:

but the biggest faller in London is Carnival

PM:

the cruise ship operator

Carnival (CCL:LSE): Last: 1,794, down 145 (-7.48%), High: 1,881, Low: 1,783, Volume: 715.18k

PM:

why have they been hit so hard specifically??

NH:

well, it goes as follows

NH:

most of Carnival’s cruises are in the Caribbean

NH:

and many of them call into Mexican

NH:

resorts

NH:

anyway, analysts all remember that Carnival was slammed during the SARs outbreak in 2003

NH:

it seems the public has this perception that disease spreads more quickly on cruise ships than anywhere else

PM:

oh, right – must remember that

PM:

so sell Carnival then

NH:

guess so

PM:

NH:

have a look at this

NH:

a note which came out of Evolution this morning

NH:

CARNIVAL (CCL.L) – SELL – PRICE/TARGET : 1939p/1470p
INTERCONTINENTAL HOTELS (IHG.L) – REDUCE PRICE/TARGET: 672p/485p

EVO TAKE – The outbreak of swine flu in Mexico revives unhappy memories of SARS that impacted the hotel and airline stocks hard in 2003. This time Carnival (Sell, TP 1475p) is the most immediately vulnerable stock as the first call of many Caribbean itineraries are to Mexican resorts and there is a public perception that ships are vulnerable to the spread of infections. If the flu spreads, then the most vulnerable hotel stock is IHG (Reduce, TP 450p).

NH:

DETAILS – Swine flu is reported to have caused up to 103 deaths and closed much of public life in Mexico and a World Health Organisation spokesman has commented that it is “very, very concerned”. Given how quickly flu can spread around the world, then it could be disastrous for the cruise, hotel and airline industry which are already creaking under the pressure of the recession. The SARS crisis dominated the news but thankfully lasted only about four months and some hotels in Hong Kong were actually completely empty for short periods. The crisis was short-lived and we hope that this is the case again. Until the world has visibility, the negative news flow from global media is likely to be the most damaging element of the crisis.
VALUATION AND RECOMMENDATION – In 2003 the hotel stocks dropped 15-20% and then recovered strongly as the disappearance of the threat of SARS coincided with an economic recovery. At this moment both the biological and economic recovery are uncertain.

PM:

Intercontinental

PM:

how are they faring

NH:

hang on

NH:

err, they are off 36.5p at 635.5p

NH:

a drop of almost 6%

PM:

so Holiday Inns across the US are going to be affected by swine fever

NH:

err, probably not

NH:

but why that let stand in the way of a good story

PM:

and what about the airline stocks

NH:

should we mention those

PM:

yes yes

PM:

got any comment??

NH:

here’s Evo again

NH:

EVO TAKE – By early 2003 airline traffic had essentially recovered from the effects of 9/11 and the slowdown that had preceded. February 2003 global passenger traffic was up on February of all previous years. In March 2003 traffic started to fall again and by May it was running 10% down on the previous year at the levels of May 1997. That was driven by the SARS crisis which lasted four months, during which period it dominated the news, spreading through China. Hong Kong, parts of South-East Asia and then on to Canada. It was, thankfully, short-lived but the big dip in traffic had a genuine cost and, unsurprisingly it put a proportionately big dip into share prices.

NH:

DETAILS – In fact it nipped the then nascent airline recovery in the bud, at least for a while. BAY had bottomed at 94.5p in early October 2002, rallied to 166.5p by the end of November 2002 and then started to sell off, eventually going to 86p, its cyclical and all time low, in mid March 2003. Of course, just under a year later it was 332p. We have no idea whether the current outbreak of swine flu in Mexico is likely to be as sustained as SARS; potentially it could even be worse. We certainly hope not, but it seems likely that, with the stock price near the upper end of its trading range, it is likely to underperform until this issue is resolved.

VALUATION AND RECOMMENDATION – That does not stop BAY from representing compelling long-term value, with the potential to return to 50p+ of earnings out the other side of this recession, but even before the flu issue we felt that the severe risk to earnings from weak passenger and freight traffic and poor yields would constrain the ability of the stock to perform over the next six months or so. The flu outbreak just exacerbates that existing near-term risk but does little damage, thus far, to the longer term value.

PM:

thanks

NH:

other stocks hit by the SF panic are

NH:

Cranswick, the sausage maker

NH:

Devro, which makes the sausage skins

NH:

and Genus, the animal breeding company

NH:

Genus off 31.5p at 550p

PM:

Devro down 3p at 85p

NH:

Cranswick off 25p at 615p

NH:

of course, the Swine fever panic could also be played on the upside

PM:

with drug stocks I suppose

NH:

yep

NH:

the two big flu drug makers are Glaxo and Roche

NH:

both outperforming this morning

GlaxoSmithKline (GSK:LSE): Last: 1,039, up 33 (+3.28%), High: 1,050, Low: 1,021, Volume: 9.30m

NH:

Roche up 4% at 145.1

NH:

actually I was just looking at GSK

NH:

and the sales of the its flu drug, which is called Relenza

NH:

not exactly a blockbuster

NH:

but I guess it could be

PM:

so what were sales of this drug

NH:

275m last year

NH:

that’s according to Panmure Gordon

PM:

hmmmm

NH:

We expect GSK to be positive this morning, on news emerging from Mexico
about a killer flu outbreak. Some World Health Organisation officials have
even called it a ‘potential pandemic’. Obviously GSK’s anti-viral Relenza
should benefit, but it is the vaccine business that can be transforming for
GSK if any of its vaccines are able to stop the spread of this flu. That being
said, the global damage to the economy from a flu pandemic should also
adversely affect all Pharmaceutical companies, so we are cautious about our
reaction to this news. Nonetheless, we remain Buyers of GSK

NH:

In 2008A Relenza reported revenues of £275m. We currently forecast that Relenza sales will be £250m in 2009E however, if the current situation develops into a pandemic, then we can expect to increase our forecasts substantially.

The stock is trading on 9.5x P/E (2010E). Growth is not going to be easy and will be
fairly low quality in the short term, with cost containment central to the thesis, but we
expect the dividend yield of 6.6% to provide support. The thesis has now become
differentiated with a diversified business model that will be attractive to risk-averse
investors and, although we are not fans of conglomerates – and continue to prefer
AstraZeneca – we remain Buyers.

PM:

OK, I think we have exhausted swine fever

11:17AM

PM:

Right – before we go any further – we’ve got to make time here for our Very Special Guest.

PM:

There is a clue to his identity in that this VSG is related to our shameless campaign to win a Webby this year.

NH:

Because we have invited one of our competitors to join us.

PM:

I can tell you that it is not 5 Blogs before lunch

PM:

It is not Andrew Ross Sorken of the NYT’s dealbook.

NH:

Too important

PM:

It is not the WSJ’s Deal Journal team.

NH:

No, it is…..

PM:

High there Richard – thanks for joining us today

RB:

I’m not Richard – I’m Bob.

PM:

You there Richard?

PM:

Who are you.???

RB:

I’m Bob Fear

NH:

arh, welcome Sir Richard

PM:

It’s not him!!!!

PM:

Where’s Sir Richard Branson.

PM:

I thought we were getting Sir Richard on here to promote his Business Stripped Bare blog.

NH:

So he doesn’t languish in fourth place or something in the Webby’s People Voice Vote.

PM:

RB:

er – he’s on a plane at the mo

PM:

Oh, okay.

RB:

I edit Richard’s blog for him

NH:

I see

PM:

ahh

RB:

so you’ve got me

PM:

Well, well done Bob on getting a Webby nomination – overcome very heavy competition to get this far.

NH:

Where did you get a name like Bob Fear?

RB:

it’s my stage name

NH:

good answer

PM:

Go far with a name like that

NH:

so, has Sir Richard mobilizing the Virgin troops to vote for him?

NH:

he was the GP at the weekend no?

RB:

we-ell, funny you should mention that, coz…

RB:

he’s prepared a little video message

PM:

oh — excellent

RB:

http://www.youtube.com/watch?v=zoQIYkAJHLE

NH:

Oh, no we are doomed

PM:

Back the beard @ the Webbys

PM:

Yikes — we’ve got real competition

NH:

right, can we get the editor to do one for us?

PM:

Dunno — will msg him now

RB:

he’s got Bernie and the whole of the F1 circuit backing him after a roadshow in bahrain this past weekend. expect Rubens, Jenson and Niki Lauda to come out in support.

PM:

Smart idea Bob

PM:

it’s already had 1500 views

NH:

we are doomed

NH:

beaten by the beard

RB:

that’s what you get for going up against the beard

NH:

still at least it will keep the WSJ and the NYT from winning

RB:

so you still want to form a merger!?

NH:

actually, Sir Richard has got stuck into us

PM:

Right — who ever you want to vote for go here

PM:

http://pv.webbyawards.com/

RB:

we’re planning American versions as we speak

PM:

NH:

this has gone nuclear, it is WAR.

PM:

And vote for either us or The Beard

NH:

we have a US edition too

NH:

make sure a Brit wins it

PM:

Okay Bob — good luck with Business Laid Bare

PM:

Anything else yo want to add

RB:

if you win Virgin will bid for you

NH:

the readers want to know if Sir Richard is going to make another bid for Northern Rock

PM:

Got any stock tips?

NH:

is he going to extend his sponsorship deal with Brawn GP?

NH:

what affect will swine flu have on traffic figures

PM:

Leave him alone Neil

PM:

NH:

just got something through on that – the impact on airlines stocks of SARS

PM:

Thanks for joining us Bob

RB:

so many questions – best look at the blog for our GP ambitions!

PM:

RB:

thanks for having me on!

PM:

Cheers

NH:

very funny

PM:

Let’s move on

11:29AM

RB:

may the best beard win!

PM:

hmm

NH:

we don’t do facical hair this end

PM:

Sam’s not old enough

11:29AM

11:30AM

PM:

You were talking about a CS strategy note earlier

PM:

Upgrade of UK equities??

NH:

they have

NH:

not swayed by this scare stories about the UK losing its AAA rating

NH:

its by Andrew Garthwaite and his team

PM:

so what’s his argument

NH:

well

NH:

looser monetary conditions

NH:

a workable bank insurance scheme

NH:

above average earnings momentum

NH:

presumably this reflects that the FTSE 100 is stuffed full of dollar earners

NH:

who are being helped by weak sterling

PM:

yes

NH:

and attractive valuations

NH:

certainly on a cyclical adjusted PE, the UK looks cheaper than the US right now

NH:

but then so does most of Europe

NH:

and one last plus point for the UK

NH:

it has greater exposure to NJA than European markets

PM:

NJA??

NH:

Non Japan Asia, I think.

PM:

I see

PM:

So buy UK stocks then

NH:

yep and sell Europe

NH:

which must have outperformed recently during the dash for trash

NH:

here’s the note

NH:

We upgrade the UK to overweight from benchmark to reflect: (a) policy—monetary conditions (exchange and interest rates) are now looser than other regions and normally monetary conditions lead economic activity by a year. The UK now seems to have a workable bank insurance scheme. QE amounts to 7.5% of M4 and credit conditions have eased more than in other regions; (b) above-average earnings momentum; (c) sterling looks cheap (15% discount to PPP against the euro); (d) attractive valuations (sector-adjusted P/E 31% below US, compared to 11% norm); and (e) greater exposure to NJA, our preferred region, than Europe or the US. The UK scores top of our regional scorecard. Cheap domestic UK names on HOLT®: Carphone Warehouse, Tesco, Premier Foods. Stocks that look cheap relative to their global peers are Vodafone, Meggitt, Barclays. Positions should be un-hedged.

NH:

We increase our weighting in NJA to 40% overweight from 30% (we initially upgraded end-October). NJA has the best balance sheets, allowing more policy flexibility than other regions (macro: government debt to GDP is 30%, while the IMF expects the ratio for advanced economies to go to 104% by 2011, FX reserves are 40% of GDP; private sector: the gross savings ratio is triple that of the US and the banking sector is underleveraged). Credit Suisse economists forecast 8% Chinese GDP growth. The money multiplier is rising. NJA seems to have benefited the most from the fall in food and oil prices. Historically, the region tends to outperform two months before the upturn in lead indicators and has continued to outperform until 17 months after the trough in lead indicators. NJA currencies are in aggregate 7% undervalued. NJA is used to recurrent crises and tends to have more command economies. Cheap countries on our scorecard include China. Cheap indirect plays (on HOLT) include Reckitt, Alcatel, Siemens, CAT.

NH:

We lower the US to benchmark: The relative performance of the US deteriorates as lead indicators turn up. The US is now expensive on our regional scorecard (sector-adjusted P/E ratio is on a 41% premium to Europe). Earnings momentum is now middling. The correction in private sector balance sheets is less than half-way through in our view. On our screens, US stocks expensive relative to their peers include Hershey (see page 54). Expensive overseas earners include Southern Copper, Black & Decker, RPM International.

NH:

Stay 20% underweight Continental Europe: In our view, the region has the worst macro policy (fiscal, QE or monetary), the worst labour market and economic flexibility and the worst earnings outlook (we forecast minus 46%, compared to consensus of minus 2% and minus 20% ex-financials). A quarter of exports (a third of GDP) go to Eastern and peripheral Europe, which may go through a depression. Valuations are only mildly cheap on P/B relatives. Be careful of expensive domestic Europe exposure, i.e., companies with more than half of sales to Europe and expensive on HOLT (Fraport, SKF, Scania), expensive peripheral Europe (ACS Actividades, Inditex, Bankinter) and expensive EMEA exposure (Telekom Austria, Beiersdorf, Atlas Copco). We stay underweight EMEA (ex Russia) and are benchmark Japan. Japan scores badly on our scorecard (economic and earnings momentum, monetary conditions), but it is a cyclical market.

PM:

actually that is a bit of defensive call

PM:

given that Europe should benefit more than the UK from a dash for cyclical trash

NH:

I suppose it is

NH:

and it is at odds with what a lot of strategists are saying

NH:

they seem to have gone from worrying about whether this is a bear market rally or not

NH:

to telling their clients to keep buying the trash, even if share prices have doubled or trebled

PM:

really

NH:

yep, seems to be the way consensus is moving

NH:

everyone citing the fact that economic data is not getting any worse

NH:

and banks are stabilising

NH:

etc

NH:

here’s two exhibits for the prosecution

NH:

this came out of JP Morgan this morning

NH:

We are getting no pullback so far in the reporting season. The correction
was widely expected and many clients who were on the sidelines hoped
it could provide a better entry point, a classic squeeze. While more
serious profit taking could still happen, we stick with our view that any
potential weakness is likely to be small and not another collapse. We are
halfway through reporting season, which has been well accepted so far,
and we believe one should be adding further to market exposure.

NH:

so add more exposre – get more trash

NH:

As a group, European Cyclicals troughed relative to Defensives as early
as Nov 20th, outperforming by 32% since then, so the “pain trade for
bears” has already lasted half a year. Since Nov 20th, Metals are up 48%,
Retail 48%, Capital Goods 24%.

NH:

The question is whether this rotation is getting exhausted. Out of 3
key concerns we have with Defensives – Overvalued, Overowned and
ultimately not “Immune” – we acknowledge that the valuation argument
for some Defensives (Pharma, Telecoms) is improving. However, the
other 2 still hold, and the trigger is missing, so it is too early to go
back into Defensives, in our view. We think there is one more leg of
Cyclicals outperformance to go, driven by widely disparaged continuing
stabilization in the “second derivative” of ISM, PMIs, IFO etc.

NH:

The potential upside? Cyclicals have scope to re-rate further, as in order
to move to historical average levels of P/B, Materials could move up by
51%, Industrials by 52%, Discretionary by 74% and IT by 72% from
here.

NH:

and here’s Ian Scott at Nomura

NH:

admittedly he had been banging the cyclical drum for a while now

NH:

but he is resisting the temptation to bank profits

NH:

It is a tough call, but on balance we continue to favour overweighting cyclical stocks. The Financial sector overweight is straightforward – we believe risky asset prices are
underpriced and Financials are the best sectoral representation of that. On the cyclical
side, it is fast becoming a much tougher “call”, relative to defensive sectors. On one level things are simple – we can see that green shoots are springing up in many places and when cycles turn, cyclicals outperform. However, European cyclical sector performance is already back to late September levels when measured relative to defensive sectors

NH:

Last week’s headline IFO and PMI data, came in ahead of forecasts and are consistent
with some recovery in activity, however they are still well below September 2008 levels. With cyclical stocks’ relative performance back to September, the stock market appears to be running ahead of the “news flow” from the economy. This is normal, and it is the IFO’s measure of business people’s expectations about the future (as opposed to current conditions) that is most highly correlated with both analysts’ earnings revisions and cyclical sectors’ relative performance (Figures 2 and 3).

NH:

However, further improvements in these surveys of business confidence are now a
necessary condition for continued cyclical sector outperformance – so are earnings
upgrades. The revisions balance for the cyclicals has improved along with business
confidence (Figure 3), but we think it needs to move further to sustain outperformance, given the large P/E premium the cyclicals are trading on.

However, as Figure 4 indicates, there is a large difference in the relative P/E and relative price/book valuations of the cyclicals. On P/E, the cyclicals are 43% above their “fair” value” or average P/E relative to defensive sectors. The analogous price/book-based premium is 11.5%. Book-based metrics have been a much better guide in the past. Taking the previous cyclical upswings of 1993/94 and 2007, cyclicals were expensively priced in the early 1990s on P/E about 14 months before their eventually reached the maximum book valuation premium.

PM:

thanks for all that

PM:

interesting the way consensus is changing

PM:

Despite the budget

PM:

despite the UK gov being broke

PM:

And now despite pig flu

NH:

look, get with it Paul

PM:

Dash for trash — of course

NH:

the recovery is coming

NH:

and you had better get on board

NH:

let’s just hope it is not a false dawn like 2002

NH:

because we all know what happened after that

PM:

market tanked

NH:

actually on the trash

NH:

have a look at this

NH:

some stats

NH:

courtesy of Citigroup

NH:

and their mid cap analyst Joe Brent

NH:

The FTSE 250 sustained its sharp
outperformance over the FTSE 100 for a fourth consecutive month. Over the month
the FTSE 250 was up 13.2%, the FTSE 100 1.7%, the FTSE Small Cap 23.7% and
the Aim All Share 13.8%. The trade of being overweight defensives and large-caps,
which had become consensual, has been severely punished.

PM:

SMALL CAPS UP 24%%%%%%%%%??!?!

NH:

well, you could argue they were oversold

NH:

priced for extinction

NH:

but Brent argues the mid caps are still cheap

PM:

Well i guess they are — relative to the dross at the bottom

NH:

Attractive valuation – Despite the significant outperformance, the FTSE 250
continues to look relatively attractive on an 09E P/E of 11.0x and EV/EBITDA of
6.9x. This compares to 11.5x and 6.1x for the FTSE ’100 ex financials’ which is the
more appropriate benchmark due to the FTSE 100 being increasingly distorted by
large losses anticipated in the banking sector. Page 50 shows the neglect effect has
left small caps looking very attractive still, despite a strong performance in April.

Pace of downgrades slowing – For the FTSE 250 we continued to see net
downgrades (10 upgrades vs 43 downgrades of more than 5%). However the pace
of downgrades appears to be slowing (page 39). Following a series of continued
downgrades to our GDP estimates our economists made a 40bp upward revision to
2009 & 2010 GDP estimates (to -4.1% and -0.7%).

NH:

General Retail: Upgrades (page 35) – For the first time in 24 months, UK sector
earnings look to have upside forecast risk. Proprietary Household Cashflow analysis
argues for improving UK LFL though each quarter of 2009, recovering further in
2010. In keeping with our strategists positive rating on the sector we now have no
Sell ratings. We recently raised estimates & target prices across the sector and
upgraded Signet and Sports Direct to Buy.

Risk barometer: stormy – Unusually, Mid-Cap outperformance has not coincided
with rallies in other risk appetite proxies. The FTSE 250 earnings yield and UK BBB
bond yield have diverged significantly (p59), credit spreads remain at exceptionally
high levels (p60) and the ITRAXX, which is normally highly correlated, has not
recovered (p44). Furthermore liquidity remains depressed (p61) despite
significantly lower volatility (p64).

Key recommendations (p6) – On our Key Buy list we add AGA Rangemaster and
Northern Foods and remove Derwent. On our Key Sell list we add Bodycote,
Provident Financial and Weir Group.

PM:

just keep buying then

NH:

yep, that’s the consensus call, as I said

11:40AM

PM:

Now, been accused of filling raw gap, with Sir Richard…

RAW is market chatter – information that has not been formally tested through traditional journalistic channels (PRs etc). The story might be complete rubbish, but if we believe there is some substance to it we will say so. Either way, Reader Beware.

PM:

So what have we got on Sainsbury Neil??

NH:

well, plenty, but first I would like to note that our stuff on Textron came off

NH:

but on SBRY

NH:

apparently a couple of houses pushing the idea and merits of a merger with Marks & Spencer

PM:

ah, an old rumour that

PM:

being dusted down and given a fresh airing

NH:

seems that way

PM:

It is a bull market after all

NH:

and for weeks now there has been speculation that Justin King, the boss of SBRY, is being lined up to take over from Stuart Rose when he goes

NH:

apparently this is has irritated Lord Rose

NH:

who is of the opinion that M&S can produce its next leader internally

PM:

and under the tutelage of Lord Rose as ongoing chairman presumably

NH:

yes

NH:

SBRY up

NH:

small

NH:

3.75p at 327p

NH:

(Sconse, we can’t predict share price movements am afraid)

NH:

also talk doing the rounds that the Qatar might be looking to increase its holding in Sainsbury

NH:

which last time I looked was 27%

NH:

Now, Qatar did free up a bit of cash last week

NH:

when it lobbed out 35m Barclays shares

NH:

because of some volatility driven hedging strategy

NH:

anyway

NH:

this is the sort of thing that is flying around the market this morning

NH:

The jungle drums are suggesting that the Qataris, flush with their BARC cash are now adding to their 27% stake in Sainsburys…at 30% this would trigger a mandatory bid, but one thing for sure, the Qataris confidence is now running high…

PM:

Bull market stuff

NH:

yes

PM:

NH:

right a couple more bits of RAW

NH:

small cap stuff though

NH:

one if Kopane Diamonds

Kopane Diamond Developments (KDD:LSE): Last: 13.35, down 0.15 (-1.11%), High: 13.75, Low: 12.25, Volume: 929.77k

NH:

told an offer of 22p is on the cards

NH:

and the other piece of rumourtrage we have

NH:

is a small cap company called Fenner

NH:

which makes conveyor belts

NH:

now, this company had a good bull market

NH:

because it was seen as something of a play on the mining industry and by proxy China

PM:

I see

NH:

anyway, the stock has swooshed up 12p to 62p on rumours that the company could be a takeover target for a Chinese company

NH:

now, it would be far to say not everyone is convinced by this piece of RAW

NH:

company has rfigures later this week

NH:

and I guess this company is cyclical

NH:

so the numbers could impress

NH:

it was also tipped by David Schwartz at the weekend

PM:

(taxless et al — point taken

– reader beware of course)

PM:

he’s that stock market historian guy

NH:

here’s what he wrote

NH:

I take particular delight in spotting situations where I believe the market has got it completely wrong. Experience teaches me that such situations often generate healthy profits once investors catch on to their error.
Fenner appears to fit the bill. It is a solid, well-
managed company with a record of steady growth. Its price-to earnings ratio is currently below 4, and its dividend yield approaches 13 per cent.

NH:

The company’s shares were hammered in 2008, dropping about 80 per cent in the second half of the year. Investors were worried about general economic weakness, as well as the possible effect of weak commodity prices on company profits. They failed to appreciate that Fenner’s mining-linked revenues are based on activity at the pit face, not prices that pit operators get for their output.
In my opinion, last year’s major sell-off overshot the mark by a very wide margin. Of course, Fenner did not completely escape the worldwide economic slowdown. It announced last month that weakness in its industrial services division would pull first-half profits down by 10 per cent.

NH:

But reaction to this profit warning surprised me. The shares lost half their already depressed value in a flash. Given last year’s 80 per cent sell-off, I viewed last month’s sharp drop as an overreaction on top of an overreaction.
Share prices have risen in recent weeks. It appears that other investors are beginning to agree with my assessment that the market got it wrong once again.
Fenner will issue its first-half earnings report next Wednesday. Given the amount of pessimism currently reflected in the share price, I suspect that any positive comment about the end of customer destocking could trigger a healthy rally.
On the other hand, I do not expect heavy selling pressure if Fenner’s short-
term prospects remain weak, because much of the bad news is already in the price

PM:

thanks for that

11:49AM

PM:

Should mention the mortgage numbers

PM:

Have you got those to hand Neil?

NH:

got a snap from Dow Jones

NH:

LONDON (Dow Jones)–U.K. mortgage lending and approvals weakened in March as the deepening recession weighed on confidence in the beleaguered housing market, data released by the British Bankers’ Association showed Monday.
Net mortgage lending eased to GBP3.7 billion in March from GBP3.9 billion in February, although it was higher than the average gain over the previous six months of GBP3.5 billion.

NH:

Approvals of mortgages for house purchase – a good forward-looking indicator for market activity – fell to 26,097 from 28,024 in February. The total was higher than the average of the previous six months of 23,152, but weaker than the 34,920 mortgages approved in March 2008.
Gross mortgage lending slipped to GBP8.9 billion last month from GBP9.2 billion in February, leaving it 47.2% weaker on the year and below the average of the previous six months of GBP10.4 billion , the BBA said.

PM:

Oh dear — that’s not with the bull programme!

NH:

no it isn’t

NH:

and has knocked a few housebuilders

NH:

like Taylor Wimpey

Taylor Wimpey (TW:LSE): Last: 43.50, down 3 (-6.45%), High: 46.50, Low: 42.00, Volume: 13.12m

NH:

not in keeping with the buy the trash thesis

11:51AM

PM:

Thanks for that snap Daddy — Spain got a case of pig flu

NH:

just having a look at a few other asset classes

NH:

10-year UK

NH:

looks to have improved a bit this morning

NH:

yield 3.461

NH:

isn’t gold up as well?

PM:

it is — this mornings fix was at 911.75 — 907 previously

NH:

the GBK

NH:

90p vs the Euro

PM:

Spot gold at 914 i think

NH:

and $1.458 against the dollar

11:54AM

PM:

request below for some stuff on Aviva

NH:

results out this morning

NH:

and they look pretty good

PM:

Think it was interim management statement

NH:

it was

NH:

looks pretty good though

PM:

Surprisingly go — pretty well no signs of the crunch

NH:

a big rise in its IGD surplus

NH:

although I suspect the company was be rather disappointed with the response

PM:

And a hedging operation

NH:

up just 6.5p at 280p

PM:

Insure against a collapse in equities

NH:

but then the stock has had a very good run

NH:

so perhaps the reaction is not too bad

NH:

overall

NH:

the numbers should help to assuage some the recent capital fears

NH:

here’s what stood out for me

NH:

IGD surplus now £2.5bn

NH:

q1 life and pension sales well above expectations

NH:

a better than expected performance in Europe

NH:

all of which could be a bit scary for anyone who is short

PM:

Got any analysts comment on Aviva??

NH:

a few bits

NH:

here’s Merrill/BoA

NH:

who have upgraded

NH:

Aviva has announced an impressive trading update with sales and more
importantly, the group’s capital position well ahead of forecast.
Starting with capital, the group IGD surplus at the end of Q1 was £2.5bn; this is
after allowing for the cost of the final dividend. Consensus and our own
expectations were for a figure around £1.5-1.7bn (the end of 2008 figure was
£2.0bn). There are a number of reasons for the beat. First, the cost of the
dividend was £300m lower than expected due to the high take-up of the scrip
option. Second, Aviva has issued hybrid capital (known) and further reinsured its
UK life business in Q1. Third, Delta Lloyd has made an ‘increased contribution’,
including the benefit of selling its health business. Fourth, sensitivity has been
further reduced in the quarter through hedging with a 40% drop in equity markets
now only taking £200m off the IDG (previously £800m).

NH:

Moving on to sales, total sales of £10.3bn were 5% higher than last year and
around £1bn above consensus expectations. The beat came in long term
savings sales in both Europe (£700m above forecast) and the US (£400m above).
The company has commented that sales margins are holding up, in line with FY
2008.

Other points: discussions on the inherited estate are drawing to a close. Any
payment would be substantially lower than previously announced and would not
require external capital. No commercial real estate loan defaults in Q1.
Speculation in the weekend press that Nic Nicandrou, Aviva’s UK CFO is leaving
to take up the Prudential group CFO role. This is further unwelcome brain drain
from Aviva.

So overall reassuring figures from Aviva, with the management taking actions to
mitigate investors biggest concerns on capital. This should lead to reppraisal of
shorts, in our view.

NH:

and here’s some stuff from Cazenove, which is much longer

NH:

Aviva – good Q1 sales, very good solvency [AV.L, AV/ LN, 239p] IN LINE, sector – Neutral
The solvency position is significantly stronger than expected, with EUIGD surplus of £2.5bn, compared to our estimate of £1,735m. The difference reflects hybrid issuance (we assumed £200m announced on 1/4/09 fell into Q2), £200m from scrip take up, and some reinsurance. In addition, equity sensitivity of the surplus has fallen significantly, with a 40% decline reducing solvency by just £0.2bn, compared to £0.8bn as reported at prelims. A 40% gain would still benefit the surplus by £0.8bn. The orphan asset negotiations are still grinding on but any settlement will be substantially lower than the original proposal and not material to capital.
Aviva has reported Q109 life and pensions sales of £9,569m, 11% higher than Q108 and 14% higher than consensus. We had anticipated a decline in volumes following management’s comments at prelims that they would constrain growth in order to conserve capital. Group margin is said to be higher than FY08 even with the higher than expected volumes. Bancassurance sales grew by a particularly strong 20%. The £1,177m life and pensions beat compared to consensus was driven by European sales which were £890m higher than expected, and US sales £352m higher than consensus. The good figures in these two regions were partly offset by shortfalls in the UK of £108m and £61m in Asia.

NH:

The surprises in Europe primarily related to France (£294m better than consensus) and Italy (£603m better), although there were various other overs and unders which netted out. Overall European sales were up 11% in sterling terms and 6% lower in local currency, but the consensus was beaten by 23%. The particularly strong figure in France related to good sales from Credit du Nord branches, while a 62% increase in bancassurance volumes in Italy was mainly driven by 105% growth (71% local currency) from Unicredit.
US sales were flat compared to Q4, 84% higher than Q108, and up an impressive 33% in dollar terms. This was despite a temporary exit from the funding agreement and GIC market which had generated 21% of Q108 volume. Commission have been cut and pricing increased but the effect is not readily apparent in Q1, and it will be interesting to hear on the conference call if growth at this rate is consistent with management’s intention to conserve capital. We are told that full year margins will increase in the US.
The decline in the UK predominantly follows a slowdown in bulk annuity activity and a general focus on less capital intensive, higher margin products. Capital requirements of new business fell by one third compared to Q108 to £60m and UK margins are said to be higher. RBS volumes grew 27%. Protection sales were 24% lower due to lower payment protection cover, following the intervention by the competition commission. Other protection premiums were just 1% lower. Read-across is limited given competitor focus on mortgage protection and group risk.

NH:

The group remains on track to achieve the 98% combined ratio target for the year. Benign UK weather in Q1 was offset by storm losses in France, and global weather claims are in line with the average. No recessionary spike in claims is evident in the numbers but we note the focus is on meeting the 98% COR target rather than beating it at this stage of the year. Pricing pressure is noted in Ireland and the Netherlands, while volume declines in the UK appear to have following rate related loss of market share.

11:59AM

NH:

anything else to look at?

NH:

3i are very weak on confirmation that it is considering a rights issue

NH:

shares off 30.7p at 341p

NH:

obviously this is good news

NH:

but then the market probably thinks the company is cynically taking advantage of recent share price gains to bang out some stock

NH:

and this will be just the start

NH:

I expect Taylor Wipeout to do the same very soon

NH:

here’s some quick reaction

NH:

No guidance: 3i appears to have put out this holding statement following leaks in the press and it is not particularly informative. The Board has yet to definitely decide to proceed with the capital raising and there is no guidance on the amount that may be raised and potential pricing of the issue. Pres comment has suggested an issue of £500-£700m.

NH:

Potential re-rating?: We believe that 3i is trading on between a 35%-40% discount to current NAV and a 31% discount to our estimate of 535-545p at 31.03.09. In our view, the primary reason why the discount is so wide, is concern about the high level of leverage on the balance sheet, which we estimate to be around 90% of NAV. If leverage is reduced through a rights issue we think that over time the discount will narrow on the post rights NAV. We also believe 3i will be well positioned to take advantage of some good investment opportunities in the next couple of years, given that some other private equity firms will be out of the market for some time.

NH:

Leverage: We currently estimate 3i has around £1.9bn of net debt and between £700m-£800m of cash on the balance sheet. 3i say they do not have any material covenants on the debt. We assume some of the proceeds of any rights issue will be used to pay down debt. We note that 3i’s debt has been trading significantly below par and if 3i was to purchase debt below par in the market this would be NAV enhancing. Going forward if we assume a capital raising of around £600m and asset sales of around £300m, net debt would fall to around £1bn and leverage to around 40-50% of NAV.
• Dilution: At this stage there is no guidance on the price or size of any rights issue. However, if we assume in Example 1: 2 new shares for 3 old at a price of 200p to raise around £500m, we calculate NAV would fall from an estimated 540p at 31.03.09 to 405p post rights. If we assume the shares then trade on a 15-25% discount to the post rights NAV, the share price would be in the range of 344p to 304p.

NH:

In Example 2: If we assume 2 new shares for 3 old at a price of 250p to raise around £625m, we calculate NAV would fall from an estimated 540p at 31.03.09 to 425p. If we assume the shares then trade on a 15-25% discount to the post rights NAV, the share price would be in the range of 361p to 319p.
• Hold, Target price 320p: Following today’s announcement we are maintaining our Hold rating with a price target of 320p which compares with a closing price of 372p on Friday. This was based on a sum-of-the parts valuation based on an estimated NAV of 490-500p at 30.09.09 and applying a 5% discount to 3i’s quoted portfolio and a 50% discount to the unquoted net assets. This was a relatively wide discount to reflect the high level of leverage in 3i’s structure. Post the rights issue, given that leverage will be significantly lower we think it appropriate for 3i to trade on a narrower discount to NAV. If we assume a post rights NAV of 395-405p and we apply a 5% discount to the quoteds and a 30% discount to the unquoted net assets, this would give a fair value or target price of 315-320p.

NH:

that was from Iain Scouller at Oriel Securities

PM:

cheers

PM:

Thanks for all that

PM:

Are we done for today?

PM:

Just mention Birmingham city breifly

NH:

think so unless you want to mention Birmingham City

PM:

stock is off6p at 33.5p

PM:

Weekend’s events?

NH:

yeah, the last minute loss to Preston

NH:

they need to win their last game to up automatically

PM:

okay

NH:

and that is away at Reading

PM:

AV reduced to talking about Birmingham City

PM:

We must be done

12:04PM

PM:

We should say a big thank you to Bob Fear of Virgin, — filling in for Sir Richard Branson at the last minute

PM:

The Beard did join us by youtube video, however

PM:

Go now to the People’s Voice website to vote in the webbies – if you have not already done so

PM:

http://pv.webbyawards.com/

PM:

Please

NH:

some breaking news from the pub world

-ADNAMS PLC – AT THE END OF APRIL OUR TOTAL SALES OF ADNAMS BEER WILL BE JUST OVER 1% AHEAD OF WHERE THEY WERE A YEAR AGO

PM:

That’s with the bull programme — ta

PM:

Thanks for all the comments below

PM:

We will be back at 11am tomorrow

NH:

cya then

This entry was posted by Paul Murphy on Monday, April 27th, 2009 at 11:01 and is filed under Uncategorised. Edit this entry.

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Markets live transcript 27 Apr 2009

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